A Volatile Week

I had arthroscopic knee surgery (nothing major) this morning, so please excuse
this abbreviated (and analysis-lacking) Bulletin. I am hoping to edit and improve
it tomorrow.

Wild volatility returned to the U.S. equity market. On the back of today's
surge, the Dow and S&P500 ended the week with gains of just under 1%. The
Morgan Stanley Consumer index added 1%, while the Morgan Stanley Cyclical index
was about unchanged. The Transports and Utilities, however, ended the week
2% in the red. The broader market was about unchanged, with the small cap Russell
2000 flat and the S&P400 Mid-Cap index down about 1%. The technology sector
was strong. The NASDAQ100 gained 3%, returning the index to break-even for
the year. The Morgan Stanley High tech index added 2% and The Street.com Internet
index 1%. The Semiconductors surged 7% this week, while the NASDAQ Telecom
index was about unchanged. The Biotechs missed the rally, dropping 3% for the
week. The Securities Broker/Dealer index was unchanged, while the Banks added
about 1%. With Bullion pummeled for $18.30, the HUI Gold index dropped 3%.

Credit market performance was mixed. For the week, two-year Treasury yields
were unchanged at 1.61%. Five-year yields declined four basis points to 2.85%,
while the 10-year Treasury note saw its yield rise one basis point to 3.94%.
Interestingly, the long-bond performed poorly, with yields jumping eight basis
points to 4.88% (inflation worries?). Benchmark mortgage-backs appeared to
under-perform (yields generally up three basis points), while agency debt continues
to perform quite well (implied agency yields down three basis points). The
spread on Fannie's 5 3/8 2011 note narrowed 2 basis points to a very narrow
33 basis points. The 10-year dollar swap spread narrowed 2.5 to 42, with agency
and dollar swap spreads narrowing to levels not seen since pre-Russia/LTCM
September 1997. However, corporate spreads began to widen this week. Ford and
GM saw their debt spreads (to Treasuries) widen five or six basis points. Junk
bonds were pounded yesterday, with speculative grade spread indices widening
almost 20 basis points. While generally unimpressive, today's rally put the
dollar slightly in the plus column for the week. Declining less than 1%, commodities
gave back a portion of their recent strong gains.

February 11 - Bloomberg: "Cotton prices soared the exchange-imposed limit
on speculation that China has increased purchases of the fiber. China, the
world's biggest consumer of cotton, has bought at least 300,000 bales of cotton
from U.S. shippers, traders said. The sale couldn't be confirmed. 'China is
buying anything that isn't nailed down.'"

The corporate bond market continues to enjoy extraordinary liquidity. Crown
Cork & Seal's $2.12 billion (raised from $1.75 billion) issuance was the
largest junk bond financing in three years (according to Bloomberg). American
Electric Power raised $2 billion, CIT raised its bond issuance 33% to $1 billion,
and PHH, a division of Cendant, sold $1 billion of bonds. It is worth noting,
however, that Mandalay Resorts postponed their $300 million offering, while
Citgo has delayed its offering until next week.

California sold $900 million of general obligation this week at historically
wide spreads. The state sold seven year tax-exempt bonds at a yield of 3.71%
(6.66% tax equivalent), a 48 basis point premium to top-rate muni issuers.
This was about 30 basis points more than state of New York yields and up from
the 25 basis point premium California paid back in October.

Divergences, not surprisingly, are increasingly evidence in the economic landscape
as well. The manufacturing sector continues to show signs of life. This morning
provided a stronger-than-expected 0.7% increase in Industrial Production (strongest
gain in six months) and a slight uptick in Capacity Utilization. Earlier in
the week, Retail Sales Less Autos were reported stronger-than-expected (although
weak auto sales saw an overall disappointing retail sales report). Retail Sales
were up 4.6% y-o-y, with Retail Sales Less Autos up 5.8% y-o-y. Sales growth
was led by Building Materials up 6.6% y-o-y, Health Stores up 5% y-o-y, Gasoline
Stations up 19.3% y-o-y, General Merchandise up 5.3% y-o-y, and Eating and
Drinking up 8% y-o-y. But while the number of dollars expended remains relatively
strong, the mood is grim. Today's University of Michigan Consumer Confidence
report had the Future Situation component sinking four points to 68.8, the
weakest reading since September 1993. This index is down 12 points in two months.

Yesterday the Labor Department reported that Import Prices jumped 1.5% during
January, the strongest gain since last April. There have been only two stronger
monthly readings during the past 10 years (a 1.6% rise in April 2002, and 1.9%
in February 2000). Year-over-year import prices were up 5.5%, the highest level
since August 2000. It is worth noting that y-o-y import prices were slightly
negative as recently as September. Y-o-y by category, Food & Beverage prices
were up 5.3%, Industrial Supplies 26.8% (fuels and lubricants up 12.5% for
the month and 66% y-o-y), and Autos and Parts up 0.5%. Capital Goods prices
were down only 2.1% y-o-y, although prices have declined only slightly during
the past three months. Consumer Goods Ex Autos saw prices down 0.5% y-o-y,
although prices have increased marginally over the past two months.

February 11 - Bloomberg: "The California Public Employees' Retirement
System, the largest U.S. public pension fund, is considering selling credit
enhancement to municipal bond issuers to earn as much as $17.5 million a year.
Calpers' investment committee is considering whether the pension fund should
begin selling letters of credit or liquidity facilities to state and local
bond issuers as a way to generate income. Under the proposal, the fund would
back up to $5 billion on bonds, about 5 percent of the fund's $133.8 billion
in assets… 'The program will provide support for California municipalities
and others across the nation while adding value to our investment portfolio.'
Calpers would join a number of states that already run bond insurance programs…"

February 11- Financial Times (Jenny Wiggins): "'Bond insurers risk taking
losses in their structured finance portfolios due to ongoing weakness in the
credit markets,' Moody's Investors Service has warned. Many bond insurers
are heavily exposed to the structured finance markets, having accumulated $210bn
of exposure to the collateralised debt obligation (CDO) and credit default
swap (CDS) markets by the third quarter of 2002. To date, Financial Security
Assurance is the only bond insurer to have recorded a material loss on CDOs
and significantly increased its loss reserves. It has the largest CDO/CDS exposure
in the industry, accounting for 35 per cent. Other insurers with substantial
exposure include MBIA, Ambac Financial, ACE Guaranty and XL Capital Assurance."

Things are turning desperate at subprime auto lender AmeriCredit. Now fighting
for survival, the company is sharply reducing lending, shuttering 60% of its
branch offices, and firing 1,000 employees. But retrenchment rarely proves
a viable option in the game of subprime. Any reduction of Credit availability
- and consequent slowdown in lending growth - finds current "earnings" overwhelmed
by ballooning Credit losses. Yet, we have been amazed that the enterprising
Credit insurers have continued to provide Credit enhancements necessary for
the company to sell its securitizations. But the well is clearly running dry,
and there will be a high price to pay. We will now watch the performance of
the company's securitizations and how quickly loss "triggers" hits
the company and its various Credit insurers. This looks to be one more blow
to an increasingly punch-drunk asset-backed securities market, as well as a
significant escalation of the bursting of the consumer debt Bubble. AmeriCredit
ended 2002 with managed receivables of $16.2 billion (up 60% in 18 months!).
At $1.533 billion, AmeriCredit is #16 on MBIA's "Top 25 Structured Finance
Servicer Exposures."

Weekly bankruptcy filings jumped to 32,223, up 9% to the highest level since
early November. Last week's filings were up 14% y-o-y, on top of a high base
created by 2001's 19% surge and 2002's 5.7% increase. In blow-off week #34
of The Great Mortgage Finance Bubble, the Mortgage Bankers Association Refi
application index declined 2.7% from the previous week, while remaining up
156% from the year ago level. The Purchase application index declined 11.4%
to the weakest reading since March, although it was up 4.5% y-o-y. A one-year
adjustable-rate mortgage could be had last week at 3.61%, down from the year
ago 5.10%. National Mortgage News this week estimated fourth-quarter 2002 mortgage
originations at a stunning $1 Trillion. Wow…

Highlights from Countrywide Financial's January production report: "Loan
fundings reached $33.7 billion, up 127 percent from last year's $14.8 billion.
This marks the third highest funding month in the Company's history… Average
Daily applications remained strong at $2.0 billion, up 111 percent from January
2002… The month end mortgage pipeline closed at $48.2 billion, up 110%
over last year's… The servicing portfolio reached a record $469 billion… Total
assets at Countrywide Bank now stand at $6.5 billion…" Y-o-y, January
Purchase Fundings were up 61%, Non-purchase (refi) Fundings 159%, Home Equity
Fundings 47%, and Subprime Fundings 50%.

Fannie Mae reported that January "Total business volume rose to a record
high of $121.1 billion. Fannie's retained mortgage portfolio jumped $19.8 billion,
or 34.6% annualized, during January to $810.6 billion. Over two months, Fannie's
retained portfolio has surged $49.9 billion, or 39% annualized. To put this
Credit creation into perspective, Federal Reserve Total Assets have expanded
$14.3 billion over the past two months to $697 billion, and have increased
$62.4 billion (9.8%) during the past twelve months. Fannie's total Book of
Business (retained mortgage portfolio plus mortgage-backs sold into the marketplace)
is up $78.7 billion, or 27% annualized, over two months to $1.859 Trillion.
Fannie's Book of Business is up $278 billion, or almost 18%, over the past
twelve months.

February 12, 2003: "Median existing-home prices are increasing at strong
rates in most metropolitan areas and typically are increasing well above historic
norms, according to the latest quarterly survey by National Association of
Realtors… The association's fourth-quarter metro area home price report,
covering changes in 120 metropolitan statistical areas, shows 39 areas with
double-digit annual increases in median existing-home prices and only 10
areas posting generally small price declines… David Lereah, NAR's chief
economist, said inventory shortfalls continue to squeeze home prices in many
areas. 'There was an average 4.7-month supply of homes on the market during
the fourth quarter, well below the 6.0-month level considered to be a generally
balanced market between buyers and sellers. The tight supply of available homes
has persisted for several years now. The result is that home prices in the
fourth quarter rose almost three times faster than historic norms."

Wednesday the National Association of Realtors reported median prices for
fourth-quarter existing home sales. And despite increasingly vocal propaganda
arguing otherwise, data are rather conclusive that we remain in the midst of
an historic national Mortgage Finance Bubble. Accordingly, inflationary manifestations
are rather conspicuous from coast to coast. Fourth quarter prices were up 8.8%
y-o-y, with gains of 12.9% in the Northeast, 8.9% in the Midwest, 7.7% in the
South, and 10.8% in the West. The California housing Bubble saw the top two
along with the eighth lending price gainers by metro area, with Sacramento
up 26.7% y-o-y, San Diego up 26.6%, and Orange County gaining 20.4%. Median
prices were up 24.6% in Providence, RI , 23.6% in Nassau/Suffolk, NY, 22.1%
in Monmouth/Ocean, NJ, 20.9% in Melbourne, FL, 20.8% in Ft. Lauderdale, FL,
and 20.2% in "NY/NJ/CT." Other notable gains included the "Los
Angeles Area" up 19.8%, Milwaukee, WI 19.7%, Chicago 15.7%, Baltimore
14.2%, Washington DC 14.1%, Philadelphia 12.6%, San Francisco 11.3%, Boston
10.2%, and Minneapolis 10.2%.

February 12 - Bloomberg: "Total existing-home sales, which include single-family,
apartment condominium and co-operative sales, rose in 45 states and the District
of Columbia in the fourth quarter of 2002 compared with the same period in
2001, the National Association of Realtors (NAR) reported today. NAR's latest
report on total existing-home sales showed that nationwide, the seasonally
adjusted annual rate was 6.55 million units in the fourth quarter, up 8.6 percent
from the 6.03 million-unit level in the fourth quarter of 2001. In addition,
fourth-quarter sales were up 5.8 percent from a pace of 6.19 million units
recorded in the third quarter of 2002 and were the second-highest level on
record."

February 12, 2003 - Representative Bernard Sanders: "Mr. Greenspan, I
always enjoy your presentation, because frankly, I wonder what world you live
in."

Alan Greenspan does appear increasingly detached from reality, while his stature
in Washington is in strikingly steep decline. For a senator to call (rather
disrespectfully) for the Fed Chairman's resignation on national television
is in stark contrast to the idolatry of too many years past. And there is no
denying that Greenspan's analysis is poor and lacking of credibility, even
to those that have revered him. He is clearly overstating the current economic
impact from the imminent conflict with Iraq. He is determined to disregard
the severe economic maladjustments imparted over his long tenure. At the same
time, he is seemingly distracted from the critical issue of the impending financial
and economic quagmire. He continues to trumpet the exceptional performance
of contemporary finance and the U.S. financial sector specifically, while appearing
oblivious to the developing dislocations throughout "structured finance." He
cannot say enough good things about the household housing/mortgage environment,
but then plays cautious when it comes to its Master, the GSEs. And, remarkably,
in just two days of testimony he at the same time disappointed the Administration
and the "Keynesian" inflationists. Perhaps Dr. Greenspan has been
rattled by the energy price spike and heightened inflationary pressures.

New Hampshire Senator John Sununu: "I have one final question about the
mortgage industry. You talked about the degree to which mortgage rates, being
at historic lows, have encouraged refinancing, and refinancing activity is
at a very high level right now. In the past, you've been very candid about
your concerns regarding the GSEs and your thoughts regarding changing some
of the current legislation that provides benefits to GSEs. Let me talk about
one particular reform, which I think is topical because of the Sarbanes-Oxley
bill, and that is oversight -- greater oversight or involvement of the SEC
in the mortgage market and the secondary mortgage markets in particular. To
what extent do you, I guess, support, or would you support SEC oversight or
involvement in the GSEs, but to what extent would that affect costs of mortgages
and liquidity in the mortgage markets?

Chairman Greenspan: "Without stipulating whether I would agree in any
particular proposal, because without seeing the specific proposal, just basically
saying that this agency should oversee this part of the economy, I don't think
is enough information. But having said that, the major issue here is to
what extent is the subsidy, which is implicit in the GSE debentures, even though
they are not legally an obligation of the United States government, they are
not backed by the full faith and credit of the United States, it's the market
which presumes that they will be bailed out that effectively enables them to
sell mortgages at a number of basis points below what the market would otherwise
be. As a consequence of that, some of that does go through into lower
mortgage interest rates, but as best we can judge, it is a very small number.
So I'm not at all convinced that many of the proposals really make all that
much difference to the secondary mortgage market or to the level of mortgage
interest rates to the American public.

Georgia Senator Zell Miller: "This also is a question that comes from
personal experience. I'm sitting here between two former governors, one's left,
but from time to time -- I don't know about them, but from time to time, we
get to thinking that maybe it would be better to be back in the statehouse.
Except right now, it's not too good back in the statehouse. And so my question
to you is, do you think the Congress should address in any way the budget
shortfalls that the states are having? And if so, what would be your approach?

Chairman Greenspan: "This is a difficult question, largely because the
source of the problem in many of the states, as you know, Senator, has been
that with the fairly substantial surge in revenues that the states had, in
many cases, and it's hard to know how many, permanent programs for expenditures
were financed. And to a large extent, because the tax rate on capital
gains and options and the like are --or, I should say the tax rate on capital
gains in the states are pretty much equivalent to the regular income tax
rates, since the adjusted gross income from the federal returns are what
are used for the income tax where it is applicable for the states. And we
saw a very big surge in federal revenues, but for some states, because the
tax rates are relatively higher, they saw an even greater surge. So that
you have to weigh the fact that some of the states overexpended and should
and will and are appropriately pulling back, and others didn't. And the question
is, how does one - how does the Congress or the federal government appropriately
handle that without essentially treating those who were not sufficiently
conservative t contain their funds from those who are less conservative? In
other words, how does one make a program which is fair to everybody?

I have no objection, obviously, to having federal funds go to the states.
That's - we've been doing that for decades. But I must admit, I do have
some problems how one -- how would one in fairness create a program which did
not essentially benefit those who are the least conservative in their programs
relative to those who were. If that can be done, then I think that there
are obvious arguments in favor of it.

Texas Representative Ron Paul: "I have a question relating to the speech
that you gave at the economic club in New York in December. Because you introduced
your speech with three paragraphs dealing with gold and the -- and monetary
policy. And you made some very pertinent points about gold, indicating that
from the year 1800 to 1929 the price levels were essentially stable under gold.
And after we got rid of the gold restraint on the monetary authorities, prices
have essentially increased by over tenfold since that time. But you also follow
that by indicating that inflation, when it was out of control in 1979, monetary
policy changed direction in a way, and they were able to take care of inflation,
more or less conquer inflation, and that now you are more or less not concerned
about inflation, that your concern, really, is about deflation. And it was
interesting that you brought up the subject of gold, of course. And there's
a lot of speculation as to exactly why you did this and what this means.

But my question deals with whether or not we should forget about inflation,
whether or not this has been dead and buried. Federal Reserve credit for
the last three months has gone up at the rate of over 28 percent. Inflation
is a monetary event, so therefore we have monetary inflation. The median
CPI is almost going up at twice the rate as the CPI, close to 4 percent.The
Commodity Research Bureau index is going up in the last 15 months over 35 percent. Gold
is up 36 percent over 18 months, or 15 months. Oil is up 60 percent. So
we have a lot of inflation. And we have medical care costs skyrocketing, housing
costs going up, the cost of education going up, the cost of energy going up. And
to assume that we shouldn't be concerned about inflation, all we can do now
is print money, I would suggest that this is what we've been doing for three
years, the monetary authorities. We've ... you've lowered the discount
rate 12 times, and there's still no signs of good economic growth. So when
-- when will you express the concern about an inflationary recession? Because
that to me seems like our greatest threat, because that has existed before,
we even had a taste of it in the '70s. We called it stagflation. So I'd
like you to comment on that as well as follow on your comments on just why
you might have brought up the subject of gold as the New York speech.

Chairman Greenspan: "First of all, we have not lessened our concerns
about inflation. Indeed, our general presumption is that we seek stable prices.
And stable prices mean no inflation or deflation. The reason I raised the
issue of gold is the fact that the general wisdom during the period subsequent
to the 1930s is that as we moved to essentially a fiat money standard, that
there was no anchor to the general price level. And, indeed, what we subsequently
observed is, as you point out, a very marked increase in general price levels,
indeed, around the world as moved ourselves from commodity standards, and specifically
gold. I had always thought that the fiat money system was chronically and
inevitably an inflation vehicle, and indeed, said so repeatedly.

I have been quite surprised, and I must say, pleased by the fact that central
bankers have been able to effectively simulate many of the characteristics
of the gold standard by constraining the degree of finance in a manner which
effectively has brought down the general price levels. The individual price
levels to which you allude are certainly correct. I might say the gold and
the oil issue are clearly war related and not fundamental. But we still
-- looking at the broadest measures of average inflation, and the best statistics
that we have, still indicate very low inflation with no evidence of
an acceleration. That does not mean, however, that we believe that inflation
is somehow inconceivable anytime in the future. We will maintain a considerable
vigilance on the issue of inflation, and are looking all the time for evidences
of an emergence of inflation, which at this particular time we do not see.
But that does not mean that we believe inflation is dead and that we need not
be concerned about it. We will continue to monitor the financial system
as best we can to make certain that we keep prices stable. They are stable
now, and we hope to be able to continue that indefinitely into the future."